1.

The standard that addresses the accounting for revenues is

a. PFRS 16.
b. PFRS 18.
c. PFRS 5.
d. PFRS 15.

2. The objective of PAS 1 Presentation of Financial Statements is

a. to provide the basic principles in the presentation of general purpose financial statements to
improve comparability.
b. to provide the basic principles in the presentation of general and special purpose financial
statements to improve comparability.
c. to provide the basic principles in the presentation of general purpose financial statements to
improve consistency.
d. all of these

3. The heading of a financial statement most likely will not include

a. the name of the reporting entity.
b. the title of the financial statement.
c. the date of the financial statement.
d. the name(s) of the business owner(s).

4. According to PAS 1, an asset shall be classified as current when it satisfies any of the following
criteria, except
a. it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle
b. it is held primarily for the purpose of being traded
c. it is expected to be realized within twelve months after the balance sheet date
d. it is cash or a cash equivalent that is restricted

5. A liability shall be classified as current when it satisfies any of the following criteria, except
a. it is expected to be settled in the entity’s normal operating cycle
b. it is held primarily for the purpose of being traded
c. it is due to be settled within twelve months after the balance sheet date
d. the entity has an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.

6. If an entity expects, and has the discretion, to refinance or roll over an obligation for at least
twelve months after the balance sheet date under an existing loan facility, it classifies the
obligation as non-current,
a. even if it would otherwise be due within a shorter period.
b. even if the original term was for a period longer than twelve months
c. even if an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the reporting period and before the financial statements are authorized for
issue
d. choices b and c
7. When an entity breaches an undertaking under a long-term loan agreement on or before the end
of the reporting period with the effect that the liability becomes payable on demand, (choose the
incorrect statement)
a. The liability is classified as current, even if the lender has agreed, after the balance sheet date
and before the authorization of the financial statements for issue, not to demand payment as
a consequence of the breach.
b. The liability is classified as current because, at the balance sheet date, the entity does not
have an unconditional right to defer its settlement for at least twelve months after that date.
c. The liability is classified as non-current, even if the lender has agreed, after the balance sheet
date and before the authorization of the financial statements for issue, not to demand
payment as a consequence of the breach.
d. The liability is normally classified as current; however, the liability is classified as non-
current if the lender agreed by the balance sheet date to provide a period of grace ending at
least twelve months after the balance sheet date, within which the entity can rectify the
breach and during that period the lender cannot demand immediate repayment.

8. Material Omissions or misstatements of items are material if they could, individually or

collectively; influence the economic decisions of users taken on the basis of the financial
statements. Materiality depends on
a. the peso amount and degree of financial consequence of the omission or misstatement
judged in the surrounding circumstances
b. the size and peso amount of the omission or misstatement judged in the surrounding
circumstances
c. the peso amount and nature of the omission but not the misstatement judged in the
surrounding circumstances
d. the size and nature of the omission or misstatement judged in the surrounding
circumstances

9. In the extremely rare circumstances in which management concludes that compliance with a
requirement in a Standard or an Interpretation would be so misleading that it would conflict
with the objective of financial statements set out in the Framework, the entity shall depart from
that requirement in the manner set under PAS 1. When an entity departs from a requirement of a
Standard or an Interpretation, it shall disclose: (choose the incorrect statement)
a. that management has concluded that the financial statements present fairly the entity’s
financial position, financial performance and cash flows;
b. that it has complied with applicable Standards and Interpretations, except that it has
departed from a particular requirement to achieve a fair presentation;
c. that it has complied with other applicable standards other than those issued by FRSC or
IASB and the description of those accounting standards which the entity has complied to.
d. the title of the Standard or Interpretation from which the entity has departed, the nature of
the departure, including the treatment that the Standard or Interpretation would require, the
reason why that treatment would be so misleading in the circumstances that it would
conflict with the objective of financial statements set out in the Framework, and the treatment
adopted; and
e. for each period presented, the financial impact of the departure on each item in the financial
statements that would have been reported in complying with the requirement.
10. Identify the incorrect statement.
a. When an entity has departed from a requirement of a Standard or an Interpretation in a prior
period, and that departure affects the amounts recognized in the financial statements for the
current period, it shall disclose the (a) title of the Standard or Interpretation from which the
entity has departed and the (b) impact of such departure.
b. In the extremely rare circumstances in which management concludes that compliance with a
requirement in a Standard or an Interpretation would be so misleading that it would conflict
with the objective of financial statements set out in the Framework, but the relevant regulatory
framework prohibits departure from the requirement, the entity shall, to the maximum extent
possible, reduce the perceived misleading aspects of compliance by disclosing:(a) the title of
the Standard or Interpretation in question and (b) for each period presented, the adjustments
to each item in the financial statements that management has concluded would be necessary
to achieve a fair presentation.
c. Financial statements shall be prepared on a going concern basis unless management either
intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
d. PAS 1 requires an entity preparing financial statements, to make an assessment of the
entity’s ability to continue as a going concern. In assessing whether the going concern
assumption is appropriate, management takes into account all available information about
the future, which is at least, but is not limited to, five years from the balance sheet date.

11. Identify the incorrect statement.

a. The final stage in the process of aggregation and classification is the presentation of
condensed and classified data, which form line items on the face of the financial statements.
b. PAS 1 sometimes uses the term ‘disclosure’ in a broad sense, encompassing items presented
on the face of the balance sheet, statement of profit or loss and other comprehensive income,
statement of changes in equity and cash flow statement, as well as in the notes.
c. Applying the concept of materiality means that a specific disclosure requirement in a
Standard or an Interpretation need not be satisfied if the information is not material.
d. An entity shall prepare its financial statements, including cash flow information, using the
accrual basis of accounting.
e. PAS 1 requires an entity presenting its current year financial statements to also present its
financial statements for the previous year.

12. The ledger of SCHOLIAST COMMENTATOR Co. as of December 31, 20x1 includes the
following:
Assets  
Cash 10,000
Trade accounts receivable (net of ₱10,000 credit balance in
accounts) 40,000
Held for trading securities 80,000
Financial assets designated at FVPL 30,000
Investment in equity securities at FVOCI 70,000
Investment in bonds measured at amortized cost (due in 3 years) 60,000
Prepaid assets 10,000
Deferred tax asset (expected to reverse in 20x2) 12,000
Investment in Associate 36,000
Investment property 46,000
Sinking fund 38,000
Property, plant, and equipment 100,000
Goodwill 28,000
Totals 560,000

How much is the total current assets?

a. 220,000
b. 180,000
c. 340,000
d. 164,000

Solution:

Current assets  
10,000
Cash
50,000
Trade accounts receivable (40,000 + 10,000)
80,000
Held for trading securities
30,000
Financial assets designated at FVPL
10,000
Prepaid assets
180,000
Total current assets

13. The ledger of PERNICIOUS DEADLY Co. as of December 31, 20x1 includes the following:
Liabilities  
Bank overdraft 10,000
Trade accounts payable (net of ₱10,000 debit balance in
accounts) 40,000
Notes payable (due in 20 semi-annual payments of ₱4,000) 80,000
Interest payable 30,000
Bonds payable (due on March 31, 20x2) 70,000
Discount on bonds payable (30,000)
Dividends payable 10,000
Share dividends payable 12,000
Deferred tax liability (expected to reverse in 20x2) 36,000
Income tax payable 44,000
Contingent liability 100,000
Reserve for contingencies 28,000
Totals 430,000

How much is the total current liabilities?

a. 192,000
b. 186,000
c. 212,000
 d. 178,000

Solution:

Current liabilities  
Bank overdraft 10,000
Trade accounts payable (P20,000 + P5,000) 50,000
Notes payable (P2,000 semi-annual instalment x 2) 8,000
Interest payable 30,000
Bonds payable (due on March 31, 20x2) 70,000
Discount on bonds payable (30,000)
Dividends payable 10,000
Income tax payable 44,000
Total current liabilities 192,000

14. The ledger of CALLOW IMMATURE Co. in 20x1 includes the following:
Share capital 200,000
Share premium 40,000
Retained earnings, appropriated 36,000
Retained earnings, unappropriated 84,000
Revaluation surplus 60,000
Remeasurements of the net defined benefit liability (asset) - gain 30,000
Cumulative net unrealized gain on fair value changes of investment
in FVOCI 46,000
Effective portion of losses on hedging instruments in a cash
flow hedge 20,000
Cumulative translation loss on foreign operation 10,000
Treasury shares, at cost 26,000

How much is the total shareholders’ equity?

a. 460,000
b. 440,000
c. 420,000
d. 390,000

Solution:

Share capital 200,000

Share premium 40,000
Retained earnings, appropriated 36,000
Retained earnings, unappropriated 84,000
Revaluation surplus 60,000
Remeasurements of the net defined benefit liability (asset)
- gain 30,000
Cumulative net unrealized gain on fair value
changes of investment in FVOCI 46,000
Effective portion of losses on hedging instruments in a
cash flow hedge (20,000)
Cumulative translation loss on foreign operation (10,000)
Treasury shares, at cost (26,000)
Total shareholders' equity 440,000

Use the following information for the next two questions:

15. GUILE DECEITFULNESS Co. was incorporated on January 1, 20x1. The following were the
transactions during the year:
- Total consideration from share issuances amounted to ₱2,000,000.
- A land and building were acquired through a lump sum payment of ₱400,000. A mortgage
amounting to ₱100,000 was assumed on the land and building.
- Total payments of ₱80,000 were made during the year on the mortgage assumed on the land and
building, The payments are inclusive of interest amounting to ₱10,000.
- Additional capital of ₱200,000 was obtained through bank loans. None of the bank loans were
paid during the year. Half of the bank loans required a secondary mortgage on the land and
building.
- There is no accrued interest as of year-end.
- Dividends declared during the year but remained unpaid amounted to ₱60,000.
- No other transactions during the year affected liabilities.
- Retained earnings as of December 31, 20x1 is ₱120,000.

16. How much is the profit for the year?

a. 120,000
b. 160,000
c. 180,000
d. 220,000

Retained earnings
- Jan. 1, 20x1

Dividends 60,000 180,000 Profit for the year (squeeze)

Dec. 31, 20x1 120,000  

17. How much is the total assets as of December 31, 20x1?

a. 2,410,000
b. 2,520,000
c. 2,380,000
d. 2,420,000

Asset = Liabilities + Equity

Mortgage assumed on land and building 100,000

Principal payment on the mortgage (80K – 10K interest) ( 70,000)
Bank loans 200,000
Dividends payable 60,000
Liabilities, Dec. 31, 20x1 290,000

Share issuances 2,000,000

Retained earnings – Dec. 31, 20x1 120,000
Equity, Dec. 31, 20x1 2,120,000
Total assets, Dec. 31, 20x1 (liabilities + equity) 2,410,000

18. The ledger of DEROGATORY DEGRADING Co. in 20x1 includes the following:
Cash 200,000
Accounts receivable 400,000
1,000,00
Inventory 0
Accounts payable 300,000
Note payable 100,000

During the audit of DEROGATORY’s 20x1 financial statements, the following were noted by the
auditor:
- Cash sales in 20x2 amounting to ₱20,000 were inadvertently included as sales in 20x1.
DEROGATORY recognized gross profit of ₱6,000 on the sales.
- A collection of a ₱40,000 accounts receivable in 20x2 was recorded as collection in 20x1. A cash
discount of ₱2,000 was given to the customer.
- During January 20x2, a short-term bank loan of ₱50,000 obtained in 20x1 was paid together with
₱5,000 interest accruing in January 20x2. The payment transaction in 20x2 was inadvertently
included as 20x1 transaction.

How much is the adjusted working capital as of December 31, 20x1?

a. 1,651,000
b. 1,014,000
c. 1,450,000
d. 1,201,000

Solution:

The adjusted balance of cash is computed as follows:

200,000
Cash (unadjusted)
(20,000)
Cash sales in 20x2 recorded as 20x1 sale

Collection of account in 20x2 recorded as 20x1 collection

(38,000)
(40,000 account less 2,000 cash discount)
50,000
Loan payment in 20x2 recorded as 20x1 transaction
5,000
Interest payment in 20x2 recorded as 20x1 transaction
197,000
Adjusted cash balance, Dec. 31, 20x1

The adjusted balance of accounts receivable is computed as follows:

Accounts receivable (unadjusted) 400,000
Collection of account in 20x2 recorded as 20x1 collection 40,000
Adjusted accounts receivable balance, Dec. 31, 20x1 440,000

The adjusted balance of inventory is computed as follows:

Inventory (unadjusted) 1,000,000
Cost of cash sale in 20x2 recorded as 20x1 sale
 (20,000 sale - 6,000 gross profit) 14,000
Adjusted inventory balance, Dec. 31, 20x1 1,014,000

Adjusted current assets, Dec. 31, 20x1: (197K + 440K + 1,014K) = 1,651,000

The adjusted current liabilities are computed as follows:

Accounts payable 300,000
Note payable 100,000
Loan payable 50,000
Adjusted current liabilities, Dec. 31, 20x1 450,000

Working capital, Dec. 31, 20x1 = Current assets – Current liabilities

Working capital, Dec. 31, 20x1 = (1,651,000 – 450,000) = 1,201,000

19. According to PAS 1 Presentation of Financial Statements, expenses are presented using
a. Nature of expense method
b. Function of expense method
c. a or b
d. Classified and Unclassified

Use the following information for the next two questions:

Anne Jeng Inc.’s accounts show the following balances:

Cost of goods sold ₱320,000

Insurance expense 75,000
Advertising expense 25,000
Freight-out 30,000
Loss on sale of equipment 7,000
Rent expense (one-half pertains sales department) 80,000
Salaries expense (1/4 pertains to non-sales personnel) 150,000
Sales commission expense 10,000
Bad debts expense 5,000
Interest expense 5,000

20. How much is the total distribution costs (selling expenses)?

a. 198,000
b. 210,500
c. 217,500
d. 221,500

Advertising expense 25,000

Freight-out 30,000
Rent expense (80K x 1/2) 40,000
Salaries expense (150K x 3/4) 112,500
Sales commission expense 10,000
Distribution costs 217,500
21. How much is the total administrative expenses?
a. 157,500
b. 156,500
c. 147,500
d. 175,500

Insurance expense 75,000

Rent expense (80K x 1/2) 40000
Salaries expense (150K x 1/4) 37500
Bad debts expense 5,000
Administrative expenses 157,500

22. Entity A has the following information:

Inventory, beg. 80,000

Inventory, end. 128,000
Purchases 320,000
Freight-in 16,000
Purchase returns 8,000
Purchase discounts 11,200

How much is Entity A’s cost of sales?

a. 286,800
b. 292,800
c. 288,600
d. 268,800

Inventory, beg. 80,000

Net purchases:
Purchases 320,000
Freight-in 16,000
Purchase returns (8,000)
Purchase discounts (11,200) 316,800
Total goods available for sale 396,800
Less: Inventory, end. (128,000)
Cost of goods sold 268,800

23. A correct dating of financial statements is

Statement of financial position Statement of comprehensive income
a. as of a point in time for a period of time
b. for a period of time as of a point in time
c. for a period of time for a period of time
 d. time after time time and time again

24. Which of the following is considered revenue?

a. gain on sale of equipment
b. service fees
c. other income
d. other comprehensive income

25. Which of the following items is likely to be presented in the statement of comprehensive income
of a merchandising business but not of a service business?
a. Service fees c. Cost of sales
b. Salaries expense d. Income tax expense

26. A statement of comprehensive income that presents cost of sales separately from other expenses
is prepared under the
a. single-step method. c. multi-step method.
b. single-presentation. d. two-statement presentation.

27. In a two-statement presentation, information on profit or loss and other comprehensive income
is shown
a. in two separate statements, a statement of profit or loss and a statement showing other
comprehensive income.
b. in two separate statements, a statement of profit or loss and an income statement.
c. in two separate statements, a single-step statement and a multi-step statement.
d. in a single statement called “statement of comprehensive income.”

28. Expenses are presented in the statement of comprehensive income using

a. nature of expense method.
b. function of expense method.
c. single or two-statement method.
d. a or b

29. Under this presentation method, expenses are presented in the statement of comprehensive
income without distinctions as to their functions within the entity.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation

30. Under this presentation, expenses are classified as either operating or non-operating item. At a
minimum, cost of sales is presented separately.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation
31. In a statement of comprehensive income showing expenses according to their function, which of
the following is included in the line item “Distribution costs” or “Selling costs?”
a. Insurance expense c. Freight-in
b. Legal and accounting fees d. Advertising expense

32. In a statement of comprehensive income showing expenses according to their function, which of
the following is included in the line item “Administrative expenses?”
a. Salaries of sales personnel
b. Cost of sales
c. Freight-out
d. Legal and accounting fees

Use the following information for the next five questions:

The nominal accounts of Rommel SP Corp. on December 31, 20x1 have the following balances:

Accounts Dr. Cr.

Sales ₱739,000
Interest income 45,000
Gains 15,000
Inventory, beg. ₱65,000
Purchases 180,000
Freight-in 10,000
Purchase returns 5,000
Purchase discounts 9,000
Freight-out 30,000
Sales commission 45,000
Advertising expense 25,000
Salaries expense 240,000
Rent expense 30,000
Depreciation expense 50,000
Utilities expense 25,000
Supplies expense 15,000
Transportation and travel expense 15,000
Insurance expense 10,000
Taxes and licenses 60,000
Interest expense 5,000
Miscellaneous expense 3,000
Loss on the sale of equipment 5,000

Additional information:
a. Ending inventory is ₱90,000.
b. One-fourth of the salaries, rent, and depreciation expenses pertain to the non-sales department.
The sales department does not share in the other expenses.

33. How much is the net purchases?

a. ₱185,000 c. ₱194,000
 b. ₱176,000 d. ₱192,000

Purchases 180,000
Freight-in 10,000
Purchase returns (5,000)
Purchase discounts (9,000)
Net purchases 176,000

34. How much is the “change in inventory” in 20x1?

a. ₱90,000 increase c. ₱25,000 decrease
b. ₱65,000 decrease d. ₱25,000 increase

Inventory, beg. 65,000

Inventory, end. 90,000
Change in inventory – increase (25,000)

35. How much is the cost of goods sold?

a. ₱151,000 c. ₱169,000
b. ₱95,000 d. ₱127,000

Net purchases 176,000

Less: Net increase in inventory (25,000)
Cost of sales 151,000

36. How much is the total selling expense?

a. ₱420,000 c. ₱180,000
b. ₱260,000 d. ₱340,000

Freight-out 30,000
Sales commission 45,000
Advertising expense 25,000
Salaries expense (240K x 3/4) 180,000
Rent expense (30K x 3/4) 22,500
Depreciation expense (50K x 3/4) 37,500
Selling expenses/Distribution costs 340,000

37. How much is the total general and administrative expense?

a. 280,000 c. 330,000
b. 320,000 d. 208,000

Salaries expense (240K x 1/4) 60,000

Rent expense (30,000 x 1/4) 7,500
Depreciation expense (50K x 1/4) 12,500
Utilities expense 25,000
 Supplies expense 15,000
Transportation and travel expense 15,000
Insurance expense 10,000
Taxes and licenses 60,000
Miscellaneous expense 3,000
Administrative expenses 208,000

38. One of the conditions that must be satisfied in order to recognize revenue in a transaction
involving the rendering of services over a contractual period is that the stage of completion of
the transaction at the end of the reporting period can be measured reliably. Which of the
following methods for determining the stage of completion of a contract involving the rendering
of services are specifically referred to in PFRS 15 as being acceptable?
I. Costs incurred to date as a percentage of the estimated total costs of the transaction
II. Advances received to date as a percentage of the total amount receivable
III. Surveys of work performed
IV. Revenue to date divided by total contract revenue
a. I, III, IV b. I, III c. I, II, IV d. I, II, III

39.The Grand Company placed an order with The Little Company for new specialist machinery.
The order was non-cancellable once signed and Grand agreed to pay for the machinery at the
time the order was signed on 1 February 20X7. Little held the machinery to Grand's order from 1
June 20X7, the date on which it was completed. Grand commenced using the machinery on 1
August 20X7 when Little completed the installation process. The installation is not distinct. Little
had staff on standby to deal with any operating problems until the warranty period ended on 1
November 20X7. The warranty does not provide service in addition to assurance that the
machinery complies with agreed-upon specifications. Under PFRS15 Revenue, Little should
recognize the revenue from the sale of this specialist machinery on
a. 1 February 20X7 c. 1 August 20X7
b. 1 June 20X7 d. 1 November 20X7

40. Which is incorrect concerning recognition of revenue?

a. Revenue from rendering of services over an extended contractual period shall be recognized
by reference to the stage of completion of the transaction at balance sheet date.
b. Interest revenue shall be recognized on a time proportion basis that does not take into
account the effective yield on the asset.
c. Royalty revenue shall be recognized on an accrual basis in accordance with the substance of
the relevant agreement,
d. Dividend revenue shall be recognized when the stockholder’s right to receive payment is
established.

41. In a normal sale, generally the most uncertain factor in the revenue recognition process is
a. the seller's fulfillment of its responsibility in the transaction
b. the measurability of the resource or item received by the seller
c. the realizability of the resource or item received by the seller
d. the relevance of the resource or item received by the seller
42. Which of the following methods of service revenue recognition usually would be most
appropriate for a business engaged in packing, loading, transporting and delivering freight
(where each of the processes is an input to a combined output specified by the customer)?
a. Proportional performance method (i.e., over time as the entity progresses towards the
complete satisfaction of the performance obligation)
b. Completed performance method (i.e., at a point in time when the entity completes the output
specified in the contract)
c. Specific performance method (i.e., when the customer pays for the completion of a single
specific activity)
d. Collection method (i.e., when cash is collected)

43. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a price
for the machine. As per the terms of the sale agreement, it is FOB (tree on board) contract and
the title passes to the buyer when goods are loaded into the ship at the port. When should the
revenue be recognized by the entity?
a. When the customer orders the machine.
b. When the deposit is received.
c. When the machine is loaded on the port.
d. When the machine has been received by the customer.

44. A company manufacturing and selling consumable products has come out with an offer to
refund the cost of purchase within one month of sale if the customer is not satisfied with the
product. When should the company recognize the revenue?
a. When goods are sold to the customers.
b. After one month of sale.
c. Only if goods are not returned by the customers after the period of one month.
d. At the time of sale along with an offset to revenue for the refund liability for the products
expected to be returned.

45. A computer chip manufacturing company sells its products to its distributors for onward sales
to the ultimate customers. Due to frequent fluctuations in the market prices for these goods, the
company has a “price protection” clause in the distributor agreement that entitles it to raise
additional billings in case of upward price movement, Another clause in the distributor’s
agreement is that the company can at any lime reduce its inventory by buying back goods at the
cost at which it sold the goods to the distributors. Distributors pay for the goods within 60 days
from the sale of goods to them. When should the company recognize revenue on sale of goods to
the distributors?
a. When the goods are sold to the distributors.
b. When the distributors pay to the company the cost of the goods.
c. When goods are sold to the distributors provided estimated additional revenue is also
booked under the “protection clause” based on past experience,
d. When the distributors sell goods to the ultimate customers and there is no uncertainty with
respect to the “price protection” clause or the buyback of goods.

46. An entity manufactures and sells standard machinery. One of the conditions in the sale contract
is that installation of machinery will be undertaken by the entity. During December of the
 current year, the entity received a special onetime contract from a customer to manufacture,
install and maintain customized machinery. It is the first time the entity will be producing this
kind of machinery, and it is expecting numerous changes that would need to be made to the
machine after the installation is completed, which one period is described in the contract of sale
as the “maintenance period.” The maintenance services are an input to a combined output
specified in the contract. The total cost of making the changes during the maintenance period
cannot be reasonably estimated at the time of the installation. Costs incurred are not recoverable
if, during the maintenance period, the machinery is discovered as non-compliant with agreed-
upon specifications and the non-compliance is beyond remediation. The customer shall signify
its acceptance of the machinery at the end of the maintenance period. When should revenue
from the sale of the special machine most likely be recognized?
a. When the machinery is produced.
b. When the machinery is produced and delivered.
c. When the installation is complete
d. When the maintenance period as per the contract of sale expires.

47. Revenue is recognized at the time of sale under the:

a. cost recovery method (i.e., the outcome of a performance obligation cannot be reasonably
measured but the entity expects to recover the costs incurred in satisfying the performance
obligation)
b. collection method (i.e., when cash is collected)
c. percentage-of-completion method (i.e., the performance obligation is satisfied over time)
d. sales method when goods are sold on credit (i.e., the performance obligation is satisfied
when the goods are transferred to the customer).

The next three items are based on the following information:

Lake Corporation’s accounting records showed the following investments at January 1, 20x3:
Ordinary shares:
Kar Corp. (1,000 shares) 10,000
Aub Corp. (5,000 shares) 100,000

Real estate:
Parking lot (leased to Day Co.) 300,000

Other:
Trademark (at cost, less accumulated
amortization) 25,000
435,00
Total investments
0

Lake owns 1% of Kar and 30% of Aub. The Day lease, which commenced on January 1, 20x1, is for
ten years, at an annual rental of ₱48,000. In addition, on January 1, 20x1, Day paid a nonrefundable
deposit of ₱50,000, as well as a security deposit of ₱8,000 to be refunded upon expiration of the lease.
The trademark was licensed to Barr Co. for royalties of 10% of sales of the trademarked items.
Royalties are payable semiannually on March 1 (for sales in July through December of the prior
year), and on September 1 (for sales in January through June of the same year).
During the year ended December 31, 20x3, Lake received cash dividends of ₱1,000 from Kar, and
₱15,000 from Aub, whose 20x3 net incomes were ₱75,000 and ₱150,000, respectively. Lake also
received ₱48,000 rent from Day in 20x3 and the following royalties from Barr:

March 1 September 1
20x2 3,000 5,000
20x3 4,000 7,000

Barr estimated that sales of the trademarked items would total ₱20,000 for the last half of 20x3.

48. In Lake’s 20x3 income statement, how much should be reported for dividend revenue?
a. 16,000
b. 2,400
c. 1,000
d. 150

C 1,000 – the dividend from the 1% investment. The dividend from the 30% investment is not dividend
income but rather a deduction to the carrying amount of the investment in associate (significant influence
is presumed to exist).

49. In Lake’s 20x3 income statement, how much should be reported for royalty revenue?
a. 14,000
b. 13,000
c. 11,000
d. 9,000
D
Solution:
Royalty revenue for Jan. to June, 20x3
(received on Sept. 20x3) 7,000
Royalty revenue for July to Dec., 20x3 (20,000 x 10%) 2,000
Total royalty revenue 9,000

50. In Lake’s 20x3 income statement, how much should be reported for rental revenue?
a. 43,000
b. 48,000
c. 53,000
d. 53,800

C
Solution:
Annual rental 48,000
Amortization of nonrefundable deposit (50K ÷ 10 yrs.) 5,000
Total rental revenue 53,000

Use the following information for the next two questions:

DECORTICATE PEEL, Inc. is committed to a plan to sell a manufacturing facility and has initiated
actions to locate a buyer. As of this date, the building has a carrying amount of ₱6,000,000, a fair
value of ₱5,000,000 and estimated costs to sell of ₱200,000. At the plan commitment date, there is a
backlog of uncompleted customer orders.

51. DECORTICATE, Inc. intends to sell the manufacturing facility with its operations. Any
uncompleted customer orders at the sale date will be transferred to the buyer. The transfer of
uncompleted customer orders at the sale date will not affect the timing of the transfer of the
facility. How should DECORTICATE Co. classify the manufacturing facility?
a. Included under property, plant and equipment at ₱6,000,000.
b. Included under property, plant and equipment at ₱4,800,000.
c. Classified as held for sale at ₱6,000,000
d. Classified as held for sale at ₱4,800,000

D (5,000,000 fair value – 200,000 costs to sell) = 4,800,000

52. DECORTICATE, Inc. intends to sell the manufacturing facility, but without its operations. The
entity does not intend to transfer the facility to a buyer until after it ceases all operations of the
facility and eliminates the backlog of uncompleted customer orders. How should
DECORTICATE Co. classify the manufacturing facility?
a. Included under property, plant and equipment at ₱6,000,000.
b. Included under property, plant and equipment at ₱4,800,000.
c. Classified as held for sale at ₱6,000,000
d. Classified as held for sale at ₱4,800,000

B – not available for immediate sale in its present condition; PPE at 4.8M (5M – 200K) because the
manufacturing facility is impaired.

53. An entity in the power generating industry is committed to a plan to sell a disposal group that
represents a significant portion of its regulated operations. The sale requires regulatory
approval, which could extend the period required to complete the sale beyond one year. Actions
necessary to obtain that approval cannot be initiated until after a buyer is known and a firm
purchase commitment is obtained. However, a firm purchase commitment is highly probable
within one year. The disposal group has a carrying amount of ₱10,000,000 and fair value less
costs to sell of ₱10,600,000. How should the entity classify the disposal group?
a. Held for sale, ₱10.6M c. Under previous classifications, ₱10M
b. Held for sale, ₱10M d. Under previous classifications, ₱10.6M

B – The exceptions to the “1-yr. requirement” are met.

Use the following information for the next two questions:

In 20x1, FORGETIVE CREATIVE Co. classified a property as held for sale. The carrying amount
prior to classification is ₱400,000 while fair value less cost to sell is ₱360,000. The property is being
sold at ₱360,000.

During 20x1, the market conditions that existed at the date the asset was classified initially as held
for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that
period, FORGETIVE actively solicited but did not receive any reasonable offers to purchase the asset
and, in response, FORGETIVE reduced the price from ₱360,000 to ₱320,000. The fair value less costs
to sell on December 31, 20x1 is ₱340,000.

54. How should FORGETIVE Co. classify the property in its 20x1 annual financial statements?
a. Held for sale, ₱320,000 c. PPE, ₱340,000
b. Held for sale, ₱340,000 d. PPE, ₱400,000

B 340,000, the fair value less costs to sell, which is lower than the carrying amount of P360,000.

55. During 20x2, the market conditions deteriorate further, and the asset is not sold by December 31,
20x2. FORGETIVE Co. believes that the market conditions will improve and has not further
reduced the price of the asset. The fair value less costs to sell on December 31, 20x2 is ₱300,000. If
the property was not classified as held for sale in 20x1, its carrying amount by this time would
have been ₱350,000.
a. Held for sale, ₱300,000 c. PPE, ₱300,000
b. Held for sale, ₱320,000 d. PPE, ₱350,000

C – The asset is reclassified back to PPE at the lower of recoverable amount (i.e., 300,000) and the
carrying amount adjusted for depreciation not recognized during the asset was classified as held for sale
(i.e., 350,000).

56. WAYFARER TRAVELER Co. is preparing its December 31, 20x1, current year financial
statements. A land included in WAYFARER’s property, plant and equipment that did not
qualify as held for sale as of December 31, 20x1 was actually sold on January 5, 20x2. The
financial statements were authorized for issue on March 1, 20x2. On December 31, 20x1,
WAYFARER has total current assets of ₱9,000,000. Not included in this amount is the fair value
less costs to sell of the land amounting to ₱1,000,000. How much is the total current assets
current in WAYFARER’s December 31, 20x1 financial statements?
a. ₱8,000,000 c. ₱10,000,000
b. ₱9,000,000 d. ₱11,000,000

B – The event is disclosed only as a non-adjusting event after the reporting period.

57. On December 31, 20x1, STRIDENT HARSH-SOUNDING Co. classified its building with a
historical cost of ₱4,000,000 and accumulated depreciation of ₱2,400,000 as held for sale. All of
the criteria under PFRS 5 are complied with. On that date, the land has a fair value of ₱1,400,000
and cost to sell of ₱80,000. The entry on December 31, 20x1 includes
a. a debit to building for ₱1,320,000
b. a credit to accumulated depreciation for ₱2,400,000
c. a debit to impairment loss for ₱280,000
d. No reclassification entry will be made on December 31, 20x1

Jan. 1, Held for sale asset (1.4M – 80K) 1,320,000

20x1
Accumulated depreciation 2,400,000
Impairment loss 280,000
 Building 4,000,000

58. On December 31, 20x1, OBSTINACY STUBBORNESS Co. classified its building with a carrying
amount of ₱1,600,000 and fair value less cost to sell of ₱1,320,000 as held for sale.

The building was not sold in 20x2. However, the exception to the one-year requirement was met. On
December 31, 20x2, the fair value less cost to sell of building is ₱1,240,000.

The building was not sold in 20x3. However, the exception to the one-year requirement was still
met. On December 31, 20x3, the fair value less cost to sell of building increased to ₱1,680,000. How
much is the gain on reversal of impairment to be recognized on December 31, 20x3?
a. 440,000
b. 360,000
c. 280,000
d. 0

B 360,000, limited to the total impairment losses recognized in previous years (1,240,000 - 1,600,000
original carrying amount)

Use the following information for the next four questions:

On December 31, 20x1, INSOUCIANT CAREFREE Co. plans to dispose of a group of its assets.
Information on these assets is shown below:
Carrying amount on Carrying amount as
Dec. 31, 20x1 before remeasured immediately
classification as held for before classification as
  sale held for sale
Inventory 9,600,000 8,800,000
Investment in FVOCI 7,200,000 6,000,000
Investment property (at cost model) 22,800,000 22,800,000
PPE (at cost model) 18,400,000 16,000,000
Goodwill 6,000,000 6,000,000
Total 64,000,000 59,600,000

INSOUCIANT Co. entity estimates that the fair value less costs to sell of the disposal group amounts
to ₱52,000,000.

59. How would the reduction in the value of the assets on classification as held for sale be treated in
the financial statements?
a. The entity recognizes a loss of ₱4.4M immediately before classification as held for sale and
then recognizes an impairment loss of ₱7.6M.
b. The entity recognizes an impairment loss of ₱12 million.
c. The entity recognizes an impairment loss of ₱7.6M.
d. The entity recognizes a loss of ₱12M immediately before classifying the disposal group as
held for sale.
A Step #1: 59.6M – 64M = 4.4M Impairment loss;
Step #2: 52M – 59.6M = 7.6 Additional impairment loss

60. How much is the carrying amount of the inventory after classification of the disposal group as
held for sale?
a. 8,800,000
b. 7,950,576
c. 7,899,324
d. 7,765,391

A 8,800,000 - Carrying amount as remeasured immediately before classification as held for sale. (See also
solutions below)

61. How much is the carrying amount of the Investment property (at cost model) after classification
of the disposal group as held for sale?
a. 22,800,000
b. 21,859,794
c. 21,786,665
d. 20,766,298

B (Refer to solutions below)

62. How much is the carrying amount of the PPE (at cost model) after classification of the disposal
group as held for sale?
a. 16,000,000
b. 15,780,740
c. 15,340,206
d. 15,211,612

Fair value less costs to sell 52,000,000

Carrying amount as remeasured immediately before
classification as held for sale 59,600,000
Additional impairment loss on initial classification under PFRS 5 (7,600,000)
Allocation to goodwill 6,000,000
Impairment loss to be allocated to the other assets 1,600,000

The excess is allocated to the other assets pro rata based on their carrying amounts as follows:
Allocation of
Assets Carrying amt. Fraction Impairment Loss
Inventory N/A N/A N/A
Investment in FVOCI N/A N/A N/A
IP – cost 22,800,000 22.8/38.8 (940,206)
PPE – cost model 16,000,000 16/38.8 (659,794)
  38,800,000 (1,600,000)
The carrying amount after allocation of impairment loss is:
Inventory 8,800,000
Investment in FVOCI 6,000,000
Investment property (at cost model) (22.8M – 940,206) 21,859,794
PPE (at cost model) (16M – 659,794) 15,340,206
Goodwill -
Total 52,000,000

63. On December 31, 20x1, INGENIOUS NATURAL Co. classified its building with a carrying
amount of ₱1,600,000 and fair value less costs to sell of ₱1,320,000 as held for sale. Impairment
loss of ₱280,000 was recognized on that date. The building has a remaining useful life of 4 years
and it was depreciated using the straight-line method.

As of December 31, 20x2, the building was not yet sold and management decided not to sell the
building anymore. The fair value less cost to sell of the building on December 31, 20x2 is ₱1,240,000
while the value in use is ₱1,220,000.

How much is the carrying amount of the building upon reclassification back to property, plant and
equipment?
a. 1,220,000
b. 1,320,000
c. 1,240,000
d. 1,200,000

D
a. Carrying amount adjusted for depreciation not recognized (1.6M x ¾) = 1.2M;
b. Recoverable amount = 1.240M the higher of FVLCS and VIN
 Measurement = 1.2M - the lower of a and b above

64. On December 31, 20x1, INIMICAL UNFRIENDLY Co. entered into an agreement to sell a
component. On that date, INIMICAL estimated the gain from the disposal to be made in 20x2 at
₱2,000,000 and the operating losses prior to the date of sale to be ₱1,200,000. As a result of the
sale, the component’s operations and cash flows will be eliminated from the entity’s operations
and the entity will not have any significant continuing post-sale involvement in the component’s
operations. Accordingly, the component was classified as held for sale and discontinued
operations.

The component’s actual operating losses in 20x1 and 20x2 were ₱2,800,000 and ₱2,600,000,
respectively, and the actual gain on disposal of the component in 20x2 was ₱1,600,000. INIMICAL’s
income tax rate is 30%. Any income tax benefit is expected to be realizable. There were no other
temporary differences during the year.

What single, post-tax amounts should be reported for discontinued operations in INIMICAL’s
comparative 20x2 and 20x1 income statements, respectively?
a. (1,960,000), (700,000)
b. (560,000), (1,960,000)
c. (650,000), (1,950,000)
d. (700,000), (1,960,000)

D 20x2: (1,600,000 – 2,600,000) x 70% = (700,000)

20x1: (-2,800,000 x 70%) = (1,960,000)

65. On April 30, 20x1, ABROGATE ABOLISH Co. approved a plan to dispose of a component of its
operations. The disposal meets the requirements for classification as discontinued operations.

From January 1 to April 30, 20x1, the component earned operating profit of ₱400,000 and from May 1
to December 31, 20x1, the segment suffered operating losses of ₱200,000.

The net assets of the component has a carrying amount of ₱32,000,000 as of April 30, 20x1. The fair
value less costs to sell of the component is ₱26,000,000. Additional estimated disposal loss includes
severance pay of ₱220,000 and employee relocation costs of ₱100,000, both of which are directly
associated with the decision to dispose of the segment. ABROGATE’s income tax rate is 30%. Any
income tax benefit is expected to be realizable. There were no other temporary differences during the
year.

How much is the profit (loss) from discontinued operations to be reported in ABROGATE's
statement of profit or loss and other comprehensive income for the year ended December 31, 20x1?
a. 4,564,000
b. 4,060,000
c. 4,340,000
d. 4,284,000

Solution:
Operating profit – January 1 to April 30, 20x1 400,000
Operating loss – May 1 to December 31, 20x1 (200,000)
Impairment loss (32M – 26M) (6,000,000)
Severance pay (220,000)
Employee relocation costs (100,000)
Total (6,120,000)
Multiply by: 1 minus Tax rate 70%
Loss for the period from discontinued operations (4,284,000)

66. You are a CPA. Your client asked you for an advice regarding the items that are presented as
other comprehensive income. You will tell your client to refer to which of the following
standards?
a. PAS 1
b. PFRS 1
c. PFRS 15
d. PAS 8

67. Non-current assets held for sale and discontinued operations are accounted for under
a. PFRS 4.
b. PAS 41.
 c. PFRS 5.
d. PFRS 8.

68. When measuring the fair value of an asset or a liability, an entity refers to
a. PFRS 13.
b. PAS 28.
c. PAS 1.
d. PAS 33.

69. This standard deals with the recognition and measurement of financial instruments.
a. PAS 1
b. PAS 7
c. PFRS 9
d. PFRS 5

70. As used in accounting parlance, PFRS stands for

a. Philippine Accounting Standards.
b. Philippine Financial Accounting Standards.
c. Philippine Financial Reporting Standards.
d. Palabok, Friedchicken, Rice and Sprite.
e. All of the above

“give thanks in all circumstances; for this is God’s will for you in Christ Jesus.” - (1 Thessalonians 5:18)

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